The big short Flashcards
What did the 2008 financial crisis do to government expenditure?
Caused it to accelerate rapidly
What is Loan to Value (LTV)?
Measures how much of the house you are actually borrowing when you take out a mortgage
Why do banks prefer to give out mortgages with a lower LTV?
Because they are less risky, meaning they will offer a lower interest rate
What is shorting?
Betting on a stock to decrease in value
What are ninja loans?
Mortgages given out to those with no job or income
What are adjustable interest rates?
They start off at an extremely low interest rate, which then increases over time
How would people often deal with adjustable interest rates?
They would refinance by selling the house at a higher price once interest rates became too high
What is the obvious flaw in the cycle of refinancing and adjustable interest rates?
House prices have to keep rising for this to continue
What had many homeowners begun to do by January 2007?
Default on their mortgage repayments
What happened to mortgage bonds in spite of the increase in delinquencies?
They continued to rise
Why did mortgage bonds increase even after it became clear they were full of bad debt?
Agencies were pressured to give out inflated credit ratings so big banks didn’t go elsewhere for their ratings, as this would have a negative impact on their bottom line
How did the financial sector encourage this kind of reckless risk taking?
Those responsible had lots to gain while knowing that they were bear none of the consequences if the decisions were to backfire. They knew the taxpayer would bail them out, being ‘too big to fail’
